What Is Personal Guarantee Insurance?

How Small Business Owners Can Protect Personal Assets

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Many small businesses need financing in the form of a business loan to get started or to expand. For startup loans, in particular, the business owner often must provide the lender with some collateral and a guarantee of repayment if the business defaults on the loan. Since a new business often has little collateral and little to no income to guarantee the loan, the business owner is often required to provide a personal guarantee.

A personal guarantee is signed by the business owner pledging personal assets in the event of business default—that is, the owner's assets may need to be sold to pay off a business loan.

How Small Business Owners Can Protect Personal Assets

New business owners are often concerned about the loss of personal assets if their business fails to pay its bills or loans. But there is a new solution to keep personal assets out of the picture in the event of a business bankruptcy or default; this new solution is called "personal guarantee insurance."

What Personal Guarantee Insurance Is

Personal Guarantee Insurance (PGI) is a new insurance product created to provide small-to-medium-sized business owners and commercial real estate investors protection for personal assets when they sign a personal guarantee for a commercial loan.

Personal guarantees have long been a fact of life for business owners seeking a commercial loan, but this doesn’t lessen the risk associated with signing them. By doing so, the signer (also known as a guarantor) is responsible for satisfying the terms of the loan in the event of the business’ liquidation. This puts the guarantor’s assets (such as a home, car, college accounts, retirement accounts, etc.) at risk. PGI is designed to protect the guarantor’s assets in such a situation.

If, after liquidating the business assets, the lender seeks personal assets to repay the balance of the loan, PGI will cover up to 70% of the insured’s net liability, depending on the coverage purchased and the terms of the policy.

By covering up to 70% of the guarantor’s net liability, PGI provides the insured with a safety net without eliminating the motivation to overcome difficulties and restore the health of the business.

Who Pays the PGI Premium

PGI is an annual policy, with a premium based on the size of the loan and the risk characteristics of the underlying business. The borrower/guarantor purchases the insurance to protect their assets. The insurance is available to the business owner(s)/guarantor(s) as they have committed to a personal guarantee associated with a commercial loan. Coverage is generally only available for a limited time after the loan closing.

PGI is an annual policy, with a premium based on the size of the loan guarantee and the risk characteristics of the underlying business and loan transaction. With the answers to a few questions, a preliminary quote can be provided. The cost starts at less than 1% of the total amount of the guarantee.

Who PGI Protects

PGI is designed to protect the borrower’s assets when signing a personal guarantee. However, coverage benefits may be assigned, and many lenders view a purchase of a PGI policy positively as it provides additional value to the guarantee and reinforces the existing collateral on the business loan.

The Limits of Personal Guarantee Insurance

Coverage amounts are between 30% and 70% of the stated value of a personal guarantee, at the discretion of the guarantor(s), up to a policy limit of $2.5 million. Coverage may be written for most commercial and industrial loans (e.g., lines of credit, demand loans, term loans, commercial real estate, term facilities, and commercial mortgages) and, on a minimal basis, construction and development loans.

Loans must be secured loan transactions. Coverage may also be available for government-guaranteed loans like Small Business Administration (SBA) loans. But coverage is not written for unsecured loan transactions or highly speculative projects.

The typical company profile of a customer is a small-to-medium-sized business, generally with revenues between $5 million and $100 million, or a commercial real estate property with a value between $750,000 and $10 million. The business has a consistent performance record with a minimum of five years of operating experience and three years of credit history or principals with an equivalent track record in the industry.

How PGI Works When a Business Defaults on a Loan

In the case of a loan default, the insured(s) must notify the insurance company that issued the policy. A claims manager will be assigned to help the insured guarantors understand the circumstances, what the default means, and how to work through to a claim.